Weekend Reading – Focus on cashflow edition
Hey Friends,
Welcome to my latest Weekend Reading edition.
You can read my previous editions below:
More recently, the fighting inflation edition including how I intend to fight inflation using my portfolio.
This week, I posted this review and giveaway – make sure you enter to win one of six (6) (yes, 6!) copies of Preserving Wealth.
Enjoy the following as part of Weekend Reading and I look forward to your comments!
Mark
Weekend Reading
Thanks again to Accidentally Retired for including yours truly in his FIRE/Financial Independence blogger survey stats and results. An interesting read…
Congrats to Tawcan who is clearly saving and investing a bundle this year.
Well done National Bank – “the only direct brokerage firm affiliated with a Canadian bank to have abolished commissions for all online trades on Canadian and US stocks and exchange-traded funds (ETFs).”
Given self-directed, DIY investing is constantly gaining more ground, I am appreciative that some banks are taking notice and action. That includes BMO when I profiled their free BMO InvestorLine adviceDirect Preview DIY platform here.
Dividend Daddy decided to interview himself recently. I enjoyed reading about how he is striving to figure out his retirement drawdown approach – maybe he should check out my brother-site Cashflows & Portfolios!!
I also run a great new site called Cashflows & Portfolios, a site dedicated to helping you manage your cashflow and portfolio wisely including any retirement drawdown plans.
After visiting the site, hit me up on our Contact page to find out more about our services. Because I’m not in the business of providing any direct financial advice, the cost of these services is well below what any financial advisor would charge! I/we do provide very detailed reports based on your facts, your data, that you can tailor for your own plan.
OK, that plug aside…I think Dividend Daddy is smart to consider the following:
“I’m also exploring potential draw down strategies and strategies related to avoiding sequence of return risk. Living off dividends at least early in any retirement is particularly attractive to me although structuring it is challenging given that some dividends/distributions rest in my RRSP. Perhaps being able to only pull dividends from my taxable account for a period of time might work since most of my dividends come from my taxable account?”
On that note, check out this Cashflows & Portfolios post about managing sequence of returns risk as part of any drawdown strategy.
Focusing on cashflow in retirement
Interesting read from Christine Benz at Morningstar recently. She wrote about focusing on your cashflow needs (vs. income replacement). I guess I have a bias – I’ve always been a fan of cashflow for my semi-retirement plan – it’s one of the main reasons why most of my portfolio is invested in income-producing equities.
See my juicy Dividends page here.
Here is a punchline from that Morningstar article in case you get hung-up on the original paywall like I did!
“Confusion over income-replacement rates–combined with huge variations in actual income-replacement needs among different cohorts–highlights why I think most pre-retirees should bypass income-replacement rates and instead use their expected cash flow needs to help determine how much money they’ll need in retirement.”
I wrote about some ways to determine your financial independence number here, considering your cashflow needs and expenses.
In the Morningstar article, I would agree with most of the ways mentioned with some exceptions:
1. Start with today’s expenditures – yes, but I would also consider inflationary costs as well, especially any basic needs. Things cost more over time.
Check out my Weekend Reading – Fighting inflation edition here.
2. Consider housing changes – yes, but then again, downsizing may or may not be in your plans and besides, housing is not the only thing killing your retirement plan. Consider transportation costs where you live as well.
3. Factor in anticipated lifestyle changes – absolutely!!
4. Add in higher healthcare costs – absolutely, including long-term care needs for multiple years.
5. Add a Fudge Factor – indeed but be mindful that no two (2) personal finance plans are the same and what works for others may or may not work for you. I do believe that one universal truth is the consideration to keep an emergency fund/some cash on hand during retirement to navigate any short-term unexpected needs. If you want to use a Line of Credit for that, fine, but my preference is to not borrow money unless needed. This is especially true if you’re no longer working. Your mileage may vary…
How am I going to generate cashflow in retirement?
I know I’ll write about this more, including updating some older content to share my current thinking but in short:
- I will likely have some part-time work in semi-retirement in a few years, to help me with the transition away from full-time work.
- I will have a (higher?!) taxable account dividend income stream to lean on. I’m optimistic that taxable account income stream will cover my condo fees and property taxes – for life.
- I will have some early retirement RRSP withdrawals – likely just “living off dividends” in the early years to avoid aforementioned sequence of returns risk. Living off dividends and distributions from strategic RRSP withdrawals should cover most other expenses such as food and some discretionary spending.
Beyond that, I will of course have some cash set aside for major expenses and/or to ride out poor stock market returns.
I wrote about my cash wedge concept before and I will expand on that post in future weeks I think because I’m getting lots of reader questions about my approach.
Essentially, a cash wedge can be any combination of the following in my book:
- A cash wedge of cash savings and little bonds or no other fixed income.
- A cash wedge of cash savings, some fixed income in the form of bonds or Guaranteed Investment Certificates (GICs), and/or
- A cash wedge of cash savings, GICs, bond ETFs or simply bonds as part of a balanced portfolio (of stocks and bonds).
Either way, you can see a common denominator of the cash wedge approach is simply to have some cash savings in retirement – ideally ample amounts of it for a few reasons…
Thoughts on the cash wedge approach? Thoughts on my desire to focus on cashflow in retirement?
More Weekend Reads…
Personal finance writer Miranda Marquit received Bitcoin as compensation for an article in 2011. Here’s what’s happened since then.
Good take from How To Save Money on fixed vs. variable rates.
Dale Roberts was back to make sense of the markets this week.
Reader commentary of the week…
While I have a few emails in my inbox to get to, for future Weekend Reading editions, I thought it would be interesting to post this set of reflections from a reader shared with me in June. Food for thought as to what other readers think about!
I took some liberties with the content, not much though 😊
Hi Mark
Thanks for sharing all your useful finds. Let me share another snippet of information, based on recent experiences which may be useful repeating / incorporating in a future message to your readership.
Some of us – due to unavoidable family and career circumstances – end up with a plethora of Registered Accounts (RAs). I read this article:
Overlooked retirement income planning
Between my wife and I, we ended up with seven RAs, not counting TFSAs. These seven were a mix of PROVINCIAL and FEDERAL LIRAs, two “regular” RRSPs, one for each of us, and a spousal RRSP. Early on, this did not seem to be a big issue, but when you look at costs and position size inefficiencies (commissions increase when the same trade has to be done in different accounts), it becomes clear that consolidation is also a useful objective.
Then, it gets trickier. As you know, the LIRAs can be partially consolidated into the RRSPs for 50% of their respective values BUT ONLY upon conversion of those LIRAs into LIFFs.
(Other reading: What is a LIRA? How should you invest in it?)
That does not reduce the number of accounts yet, but it is a worthwhile step towards overall consolidation.
While deferral of any RA withdrawals MAY make sense and most financial institutions promote it, the eventual mandatory withdrawals will impact on OAS entitlement and taxes. There are also survivorship concerns as well.
(Other reading: Survivorship benefits for CPP and OAS)
DEPENDING on personal circumstances, it may well be useful to consider maximizing and possibly starting EARLY the depletion of LIRAs, for final consolidation into the RRSP which by that time may have become a RIF (Retirement Income Fund). If one seeks an early retirement, the eventual core account RRSP / RIFF should be depleted (in my opinion) assuming the LIFs go first and fastest.
Now, some bank advisors are either unaware or otherwise disinclined to offer advice in this area. At one institution, the “authorized professional ” even ducked the question about the threshold for final consolidation “you need to consult your accountant”. Some places are certainly better than others…
My point is, it seems that the main beneficiary of the account restrictions is the Financial Industry, they benefit from forced inefficiencies imposed on their clients.
Over to you.
What an outstanding email. I agree with most of this and my reader’s considerations, including account consolidation.
I know when it comes to our financial plan, we are thinking about LIRA unlocking (50%), killing off LIRA soon/first, and also spending our RRSP assets early in semi-retirement in order to keep TFSA assets “until the end” with our Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. Of course, with any upcoming federal election when it comes to the TFSA, I feel all past promises and bets are off.
Time will tell!
Enjoy your weekend!
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
A couple of thoughts on this weekend’s articles.
Regarding the cash wedge, I’m coming around to the idea of “stashing some cash”. In part, it’s related to the article on fixed vs variable mortgage rates. We’ve pretty much used fixed rates exclusively. In 1998 we bought our home with a seven year fixed rate mortgage of 6.25%. Hard to fathom that today. At the time, my wife wasn’t working full time so we needed clarity on cost. We broke the mortgage a couple of years later when rates began their slide down.
Still, we’ve been mostly a single income family, but luckily had a few years along the way with two full salaries, and several with “1+”. In hindsight we would have benefited greatly from variable rate mortgages but I watched my parents cope with mortgages in the 70’s and 80’s and knew we’d often have only one salary. As such, I always chose payment certainty.
That brings me back to the cash wedge. Although I’m reluctant to not be fully invested, it’s more aligned with my values to be a bit more conservative and so, with 5-6 years to go (and my wife just getting hired for a full school year!), we’re going to open up a new savings account and start setting aside regular amounts of our second income for our cash wedge. The “peace of mind” factor is significant for me!
I hear ya James. As I approach semi-retirement myself in a few years, I certainly see the merits of being more conservative and such – which effectively means having at least 1-years’ worth of cash savings should stocks markets implode. I suspect it will happen again at some point.
I’m likely to open an account at EQ and park it there given their decent rates. The good thing about cash is, the liquidity. No selling, no transaction costs, just a few keyboard strokes and done.
Thoughts on this one?
https://www.myownadvisor.ca/how-much-cash-should-you-keep/
That’s pretty much my plan although I will refine it in the coming years.
Mark
On consolidating your RRSP/LIRA accounts it became apparent to me that having several accounts spread in different financial institutions was costing me money. As I manage my own portfolios (and pocket the mer fees myself) I was having to hold back on stock purchases because no one account had sufficient funds to make a purchase worthwhile. If you DRIP it doesn’t matter much but having several portfolios worth several hundred thousand K overall sets up the scenario that you can not diversify your holdings very fast as no one account has sufficient funds to make a purchase worthwhile. So I consolidated in to one RRSP and one LIRA which often enabled me to make a significant stock purchase almost every month.
Spreading your money around can help insure that if one institution tanks then you won’t lose all your money but having RRSP’s held in the big banks if a pretty safe bet.
That makes a lot of sense to me Ricardo: “…consolidated in to one RRSP and one LIRA which often enabled me to make a significant stock purchase almost every month.”
I don’t have too much consolidation to do but I do have a LIRA and I intend to “unlock” 50% of that in the coming years.
Personal opinion about unlocking the LIRA is that it does nothing unless you wish to have a faster draw down on “sheltered” funds. Both the RIF and the LIF are subject to the same minimum withdrawal rates so if you are going to be withdrawing the minimum then it makes no difference.. The caveat is that the LIF has a maximum 8% per year withdrawal whereas the RIF has no maximum withdrawal criteria. You could empty it in year one if you so wished but not the LIF.
If you have significant RIF and LIF funds then tax planning becomes a factor when you start exceeding the OAS clawback threshold. Makes me wonder if not just holding money in the fall back cash account is not worthwhile just so you don’t get the clawback. The CV-19 episode has caught some of us with more loose money that the wise person would re-invest in to a taxable investment portfolio. However if that throws you in to clawback territory then just sitting on cash as a safety net may actually be the wiser choice. More to think about.
RICARDO
Yes, indeed, thanks for that. Since my LIRA is rather small in value (under 6-figures) I think it makes sense to unlock and move what I can under the RRSP – then draw down the LIRA/LIF over time. This way, I can also be strategic with RRSP withdrawals since I can take out what I want/when, to avoid being 70-something and having OAS clawed-back.
That’s my thinking anyhow! 🙂
Considering Income-replacement rates, falls into the same category as Withdrawal rates. Guess work. I prefer planning for an income that always exceeds your expense needs, even if those expenses continue to rise.
Yes, knowing your income and income streams derived from your portfolio can certainly ease the withdrawal math.
1. Start with today’s expenditures
Its called a budget. If you are not aware of what it costs you to enjoy your present lifestyle then you better get busy figuring it out. Otherwise you’ll never know how much you will need. I was a road warrior and had to guesstimate several budget items simply because I had a company car and food paid when on the road.
2. Consider housing changes
If you can you stay where you are for as long as you are able. The caveat is that the house is paid off. It still costs me less to stay here than an apartment even with taxes and maintenance. If you get too old and decrepit to keep up the house be prepared to spend some money. The Bro in L is paying $4K per month in Ottawa area for a seniors style (over 55) residence. He made enough on the sale to support that but not everyone will.
Nice place. Just keep it in mind that once you sell the house it will probably get more expensive
3. Factor in anticipated lifestyle changes
We have gotten in to cruises over the past few years. Expensive but if you budgeted for it then you’ll be OK. I have $5K per year for trips. Cruises are more than that for the good ones, MAybe you want to spend several months in Fl for the winter. Check it out before.
4. Add in higher healthcare costs
We are lucky in Qc because of the gov. prescription plan. My daughter worked in AB for a few months as part of her internship and people were asking for less expensive medication options all the time. Made her sad. Another thing to budget depending on your province.
5. Add a Fudge Factor
No matter what you calculate it WILL cost more. My fudge factor was between 10% -20% depending on the budget line.
Some things are more subject to variations, usually up, than others. The one I didn’t budget enough for was food. That was because i was on the road so I had little expense at home on the weekends.
You need to really think about what goes on in your life, You need clothes, presents, entertainment, “vacations” and even a catch all “other”. Even budget for cash. So much per month for all those small things that it is not worth getting the c.c. out for. Or the occasional cash tip. I have 23 budget lines to track my spending. I track my expenditures to see how it aligns to my budget forecasting prior to retirement. You can see where you mucked up and where you were OK. And you can see where the cost of living is going up – and it is. That is how I noticed I was paying too much “cash” in the local bar for beers.
So budget before you make the jump.
RICARDO
Thanks Ricardo. Housing can be very expensive for sure. We hope to be debt free in about 3 years.
My fudge factor is also about 10%-15% or so over what I really need. Inflation is going to keep crawling up over time. Need to factor in at least 2-3% I think, for pretty much everything. It is my hope my taxable dividend income can continue to keep pace with inflation. That’s all I really need in a few years. Growth will be a bonus.
Congrats on the new year lov Mark.
Omg! That should read Congrats on the new blog, Mark. Ah well, I needed a laugh today.
LOL. All good and thanks for that Mr. CBB.